Tall tales of the TPP (and TTIP)

Dean Baker, the co-director of the Center for Economic and Policy Research, recently wrote about official misinformation in the effort to pass Fast Track trade promotion authority legislation to grease the skids for approval of the Trans Pacific Partnership and similar trade agreements:

“Washington politics always involves a high level of silliness (does President Obama really love America?), but when it comes to trade policy it shifts to full-fledged craziness. Anything is fair game when the political establishment wants to pass major trade agreements like NAFTA or the Trans-Pacific Partnership. At such times we see respectable Washington types making pronouncements bearing so little relationship to reality that they would cause Sarah Palin to cringe.”[1]

The White House says TPP and TTIP investment chapters are similar to U.S. law.

Corporate lobbyists and even “respectable” staff of the Office of the U.S. Trade Representative, including Ambassador Michael Froman himself, have been making pronouncements to members of Congress and even environmental groups that bear little relationship to reality. They have been saying that the Trans Pacific Partnership and Transatlantic Trade and Investment Partnership provisions for investor-state dispute resolution are similar to U.S. constitutional standards (as when the state highway department takes a family’s backyard for a road expansion and must pay them just compensation).

In an op-ed in the Washington Post, Senator Elizabeth Warren attacked the TPP investment chapter and posed the very reasonable question: ”Why create these rigged, pseudo-courts at all? What’s so wrong with the U.S. judicial system?” In a reply posted on the White House website, Jeff Zients, the director of the National Economic Council, said: “The purpose of investment provisions in our trade agreements is to provide American individuals and businesses who do business abroad with the same protections we provide to domestic and foreign investors alike in the United States.”[2]

The only polite adjective that can be applied to Zients’ statement is that it is “astonishing,” given the firm conviction of the U.S. Trade Representative’s office not to depart significantly from the U.S. Model Bilateral Investment Treaty language. A leak of the TPP investment chapter text a few months after the 2012 Model BIT was published corroborated this.[3] Investor-state claims for compensation under the U.S. model for bilateral investment treaties and free trade agreement investment chapters depart significantly from U.S. constitutional standards.

The stock talking point of the U.S. Trade Representative’s office is that investment protections are intended to prevent discrimination, repudiation of contracts, and expropriation of property without due process of law and appropriate compensation and that these are the same kinds of protections that are included in U.S. law.[4] The lawyerly weasel word here is “intended.” In fact, many investment tribunals have read the language in U.S. investment agreements and the “fair and equitable treatment” language in the “minimum standard of treatment” article in particular to embody  foreign investor rights that are far more sweeping than rights provided in U.S. constitutional law, such as for example a right to a “stable legal and business framework.”  This can result in massive tribunal awards of money damages in compensation for lost future profits resulting from changes in government regulatory policy. [5]

The U.S. model for TPP and TTIP investment chapters provides greater rights for foreign investors than U.S. investors enjoy under the Constitution.

It is unnecessary to provide for investor-state arbitration in the TPP, and particularly in the TTIP. The U.S. and EU already have well-developed and generally fair court systems to resolve allegations of property rights and due process violations resulting from enforcement of environmental and public health safeguards. Most TPP countries also have well-developed and fair court systems. And, with respect to TPP countries that do not have fair court systems, it has to be asked: why is the U.S. negotiating the TPP with the communist dictatorship of Vietnam and the Sultanate of Brunei, which is ruled under a harsh form of Sharia law?

In fairness, the expropriation articles in the new U.S. Model BIT and in the leaked TPP investment chapter text are an improvement at the margins over similar language in NAFTA’s chapter 11 on investment, but are still problematic. The most serious problems are with the wide-open article on “Minimum Standard of Treatment” (especially its “Fair and Equitable Treatment” provision)[6], the definitions of “investment” and “investor,”[7] the ineffective or non-existent environmental exceptions[8], and the procedural structure for adjudication of investor claims by biased tribunals of trade lawyers.

Investors’ substantive rights in the model BIT and the leaked TPP investment chapter text are sweeping when compared to U.S. constitutional law or the general legal practice of nations around the world. Greater substantive rights follow first from an overbroad definition of investment that includes the expectation of gain or profit, and second, from vague standards of investor rights under the expropriation and minimum standard of treatment articles that are subject to multiple and conflicting interpretations by tribunals. Many tribunals have offered expansive interpretations of investor rights. Greater procedural rights flow from the business-friendly investor-state dispute resolution process and the ad hoc appointment of biased arbitrators.

Investment tribunals protect corporate privilege, not the public interest.

The wealthy enjoy greater procedural rights. The U.S. Model BIT and the leaked TPP investment chapter provide greater procedural rightsfor foreign investors than U.S. investors enjoy. For example, they get to pick one of the arbitrators. In addition, the usual practice in international law is for claims to be arbitrated on a government-to-government basis, but the new model BIT would put transnational corporations and investors on the same level as nation-states. Only foreign investors have access to these investment tribunals convened under the authority of the World Bank and United Nations. No similar procedural rights are provided to ordinary citizens, other than the occasional opportunity to file briefs as a friend-of–the-court.

A separate “court” for foreign capital is established. Foreign investors would be able to bypass domestic courts and bring suit before special international tribunals designed to encourage international investment. The authority of domestic judicial institutions is undermined. For example, an international investment tribunal, in the Chevron v. Ecuador case, issued the equivalent of an injunction to forbid the enforcement of an Ecuadorian court judgment requiring the oil company to pay for the clean up and health care costs resulting from a massive oil spill in the Amazon rain forest. Foreign corporations and investors can even sue for damages running in the millions or billions of dollars, in compensation for a legitimate court judgment. What happens the first time a foreign investor claims such an award in compensation for a U.S. Supreme Court judgment?

Tribunal arbitrators typically have a pro-corporate bias. Arbitrators in these cases are typically international commercial lawyers who may alternately serve as arbitrators one day and return as corporate counsel the next, thus raising questions of conscious or unconscious bias.[9] Scholarly studies often based on empirical research make a convincing case that arbitrator bias is real.

Crippling awards of money damages chill regulatory initiatives and put pressure on governments to settle. U.S.-style investment agreements provide a highly effective enforcement tool: the assessment of money damages. Such damage awards can be large enough to severely stress the public budgets of both small and large countries. The fear of such ruinous judgments can force a country to settle unjust investor claims and to back away from protecting the environment and the public interest.

TPP and TTIP investment chapters upset the balance between investor protection and public regulation.

Far from being a benign replication of U.S. constitutional jurisprudence, the TPP and TTIP investment chapters are based on U.S and international models for bilateral investment treaties and free trade agreement investment chapters. These models bear little resemblance to property rights and substantive due process protections in the U.S. Constitution or the legal traditions of other countries with well developed legal systems that protect private property from arbitrary expropriation and regulation. Seventy six law professors and other distinguished scholars from around the world issued a “Public Statement on the International Investment Regime” on August 31, 2010, in which they state that:

“Awards issued by international arbitrators against states have in numerous cases incorporated overly expansive interpretations of language in investment treaties. These interpretations have prioritized the protection of the property and economic interests of transnational corporations over the right to regulate of states and the right to self-determination of peoples. This is especially evident in the approach adopted by many arbitration tribunals to investment treaty concepts of corporate nationality, expropriation, most-favoured-nation treatment, non-discrimination, and fair and equitable treatment, all of which have been given unduly pro-investor interpretations at the expense of states, their governments, and those on whose behalf they act. This has constituted a major reorientation of the balance between investor protection and public regulation in international law….”

“Investment treaty arbitration as currently constituted is not a fair, independent, and balanced method for the resolution of investment disputes and therefore should not be relied on for this purpose. There is a strong moral as well as policy case for governments to withdraw from investment treaties and to oppose investor-state arbitration…”[10]

Selected endnotes

[1]  Dean Baker, Trade Crazy: The Push for Fast Track Trade Authority, Huffington Post, February 23, 2015  According to Baker “The Washington Post gave us one such gem last week when it took issue with those saying that currency rules should be part of any new trade pact. Its lead editorial last Thursday argued against including any provisions on currency. Its main point is best summarized by a paraphrase of an old Barbie line: ‘Currency values are hard.’”, available at, http://www.huffingtonpost.com/dean-baker/trade-crazy-the-push-for_b_6740130.html

[2] Senator Elizabeth Warren, The Trans-Pacific Partnership clause everyone should oppose, Washington Post,  Opinion, February 25, 2015, available at, http://www.washingtonpost.com/opinions/kill-the-dispute-settlement-language-in-the-trans-pacific-partnership/2015/02/25/ec7705a2-bd1e-11e4-b274-e5209a3bc9a9_story.html; Jeffrey Zients, Investor-State Dispute Settlement (ISDS) Questions and Answers, The White House Blog, February 26, 2015, available at http://www.whitehouse.gov/blog/2015/02/26/investor-state-dispute-settlement-isds-questions-and-answers

[3] As Professor Jane Kelsey, University of Auckland (NZ) law faculty, and Lori Wallach, Director of Global Trade Watch explain, “The United States has made it clear that it expects the TPP to include an Investor-State dispute mechanism based on the US Model BIT used in recent US FTAs, which is in turn based on the Investment Chapter 11of the North American Free Trade Agreement (NAFTA).” Investor-State” Disputes in Trade Pacts Threaten Fundamental Principles of National Judicial Systems  April 2012, available at, https://tpplegal.files.wordpress.com/2012/05/isds-domestic-legal-process-background-brief.pdf

[4] Ben Beachy and Lori Wallach, Myths and Omissions: Unpacking Obama Administration Defenses of Investor-State Corporate Privileges, Public Citizen, October 2014, p.8 available at, http://www.citizen.org/documents/ISDS-and-TAFTA.pdf .  

[5] See, Occidental Exploration and Production Company v. The Republic of Ecuador, Final Award, Ad hoc – UNCITRAL Arbitration Rules (2004), at para. 183. Italics added. Available at: http://italaw.com/sites/default/files/casedocuments/ita0571.pdf; Railroad Development Corporation v. Republic of Guatemala, ICSID Case No. ARB/07/23,  Available at: http://italaw.com/sites/default/files/casedocuments/ita0709_0.pdf

[6] Foreign investors enjoy greater substantive rights under “expropriation” and “minimum standard of treatment” articles.

Expropriation.  The vague expropriation obligations in the U.S. Model BIT and the leaked TPP investment chapter are easily given a broad or narrow reading by investment tribunals depending on the bias of the arbitrators. Tribunal decisions interpreting similar language in existing agreements are all over the map. Annex 12-D in the leaked TPP investment chapter is somewhat better than the comparable NAFTA language, but still a problem. It says that an indirect expropriation is a violation when a “deprivation” of the investor’s property is severe, disproportionate, or continues over time. A finding of discrimination or breach of contract can trigger a finding of “indirect expropriation” (aka a “regulatory taking” of property).

Minimum standard of treatment. The “minimum standard of treatment” article is the big problem in large part because in contains an open ended and largely undefined  right to “fair and equitable treatment,” that invites a subjective interpretations by arbitrators that inevitably  reflect their personal values and political philosophy about when government action is substantively unfair. These loose concepts make it very difficult to predict when a tribunal will find that justice has been denied particularly when the question is not about procedural fairness but substantive “due process.”Arbitrators are essentially asked to make a “gut call” on whether government action offends their personal sense of fundamental fairness. Successful investor claims against governments in investment tribunal proceedings have disproportionately relied on this kind of “gut check” interpretation of “fair and equitable” treatment.

[7] Sweeping definitions of investment and Investor grant foreign investors greater rights.

Definition of investment The overbroad definition of investment protects the mere expectation of gain or profit. The U.S. Model BIT defines investment to means every asset that an investor owns or controls, directly or indirectly, that has such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.  As a practical matter, this definition in combination with other language in the model BIT would result in an inflated award of damages based in part on a valuation of the investment based on speculative projections of lost future profits.  “Investment” is broadly defined in the leaked TPP text to cover permits, intellectual property rights, derivatives and other financial instruments, and contracts, among many  others.

Definition of Investor. This covers investors that have made or are “attempting to make” an investment. The broad “attempting to make” language can be satisfied by spending a relatively small amount of money to start up an enterprise or even simply seeking a permit or license. In other words it protects a speculative business plan in these circumstances. Moreover, the definition covers investors from non-TPP countries that have incorporated in a TPP country. The so-called “denial of benefits” language requires “substantial business activities” in a country that is a party to the TPP. But, this has proved to be a low threshold in some cases as tribunals have accepted jurisdiction over claims from investors that had merely set up a small office in a country that is party to the agreement.

[8] There is no effective across the board exception for environmental measures in either the U.S. Model Bilateral investment Treaty or the leaked TPP investment chapter. U.S. international investment agreements are extremely broad in coverage and provide very few general exceptions. They provide effective exceptions only for essential security interests and for disclosure of confidential information.

[9] See generally on arbitrator behavior, Gus Van Harten, Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration, 50 OSGOODE HALL L.J. 211, 226 (2012).Gus Van Harten, Fairness and Independence in Investment Arbitration: A Critique of Susan Franck’s “Development and Outcomes of Investment Treaty Arbitration, SOCIAL SCIENCE RESEARCH NETWORK 1-2 (Dec. 1, 2011), http://ssrn.com/abstract=1740031

[10] Public Statement on the International Investment Regime – 31 August 2010, available at http://www.osgoode.yorku.ca/public-statement-international-investment-regime-31-august-2010/